What a time to widen the tax base!
By Gibson Kuria
Over the last couple of months, the Government of Kenya (GoK) has had the daunting task of easing the burden of tax on its citizens, while at the same time having to raise enough revenue to sustain government operations and growing the economy.
The Tax Laws (Amendment) Act was applauded for reducing the Income Tax rates for both individuals and corporates, while in the same breath certain tax incentives, such as the lower tax rates that were available to companies who list on the Nairobi Securities Exchange (NSE), were withdrawn.
On the 8th of April, 2020, the Finance Bill was released, offering the opportunity for public debate before it is debated in Parliament and passed into law. Since the Tax Laws (Amendment) Act came with quite a number of amendments, the expectation was that the Finance Bill would be less detailed and deal with more administrative issues on tax.
However, the Finance Bill clearly seeks to expand the tax base by doing away with a number of exemptions, which is indeed fundamental in any progressive tax regime, but the timing of such a move may be inappropriate considering the current economic situation.
Among other proposals, the Cabinet Secretary of the National Treasury proposes to charge VAT at a standard rate on Liquefied Petroleum Gas (LPG). LPG is widely used in many homesteads and thus an increase in price will definitely increase the cost of living for homesteads that are already struggling due to the pandemic.
Further, the Bill seeks to charge VAT on raw materials used to make automotive and solar batteries in Kenya. Such a move will erode and undermine all the efforts which have been put in place to champion the use of clean energy in Kenya.
The Bill also contains a proposal that the energy, aviation, agriculture (tractors) and manufacturing (plastics) sectors, which currently enjoy VAT exemptions, be subjected to VAT at 14%. If these proposals pass, it will not come as a surprise if commodity prices to the final consumers increase, and this may further impact these sectors negatively.
However, the proposal to exempt ambulance services from VAT is a welcome move as it is expected to reduce the costs of accessing ambulances, a critical requirement during the ongoing COVID 19 pandemic.
The Bill proposes to treat legal and other costs incurred by companies in relation to listing on the NSE as non-deductible expenses in computing taxable profits, a move that may discourage companies from listing on the NSE – because the consultancy costs incurred while undergoing a listing process are ordinarily quite hefty. The Bill also proposes to treat expenses incurred while carrying out projects of a social nature as non-deductible expenses. Such projects, which include schools, roads and dispensaries, may not lead to a direct increase in revenue of the company, but definitely have a positive impact in communities and should ideally be encouraged.
Whereas affordable housing is one of the current government’s ‘Big 4 agenda’ items, the Finance Bill 2020 proposes to repeal sections of the Income Tax Act that encourage Home Ownership Savings Plans. Whereas it has been argued that the uptake of Home Ownership Savings Plans has not been as positive as initially expected, one would have expected the Government to continue encouraging existence of these schemes, in order to better its chances of delivering affordable housing to the Kenyan citizens.
Needless to say, GoK is under immense pressure to collect revenue and meet all its budgetary allocations. However, 2020 may not be the ideal year to expand the tax base as the economy is struggling due to the ongoing pandemic. Suffice it to say that some of the proposals in the Finance Bill 2020 were already rejected by Parliament when debating the Tax Laws (Amendment) Bill, 2020. It is important for policy makers at the National Treasury to come up with more innovative and accommodative ways of collecting revenue in light of the present circumstances.
Gibson Kuria is a Tax Consultant at Andersen Tax, Kenya: Gibson.Kuria@AndersenTax.co.ke
Andersen Tax, Kenya is a member firm of Andersen Global. Andersen Global is an international association of legally separate, independent member firms comprised of tax and legal professionals around the world. Established in 2013 by U.S. member firm Andersen Tax LLC, Andersen Global now has nearly 4,000 professionals worldwide and a presence in over 126 locations through its member firms and collaborating firms.